2007 All Over Again - Stock Valuations Enter "Crash" Territory

Tyler Durden's picture

Submitted by John Rubino via DollarCollapse.com,

The Trump Christmas stock market rally has taken valuations beyond a point that in the past has signaled trouble, which in turn has generated a lot of cautionary press like the following:

Market indicator hits extreme levels last seen before plunges in 1929, 2000 and 2008


(CNBC) – While the S&P 500 is reaching all-time highs on optimism over Donald Trump’s economic agenda, some Wall Street strategists are increasingly worried about a widely followed valuation measure that’s reached levels that preceded most of the major market crashes of the last 100 years.“The cyclically adjusted P/E (CAPE), a valuation measure created by economist Robert Shiller now stands over 27 and has been exceeded only in the 1929 mania, the 2000 tech mania and the 2007 housing and stock bubble,” Alan Newman wrote in his Stock Market Crosscurrents letter at the end of November.


Newman said even if the market’s earnings increase by 10 percent under Trump’s policies “we’re still dealing with the same picture, overvaluation on a very grand scale.”




The Shiller “cyclically adjusted price-to-earnings ratio” (CAPE) is calculated using price divided by the index’s average historical 10-year earnings, adjusted for inflation. Yale economics professor Robert Shiller’s research found future 10-year stock market returns were negatively correlated to high CAPE ratio readings on a relative basis. He won the Nobel Prize in economics in 2013 for his work on stock market inefficiency and valuations.


Other academics agreed the current extreme CAPE ratio of 27.7 is a worrying sign for future returns versus bonds.


“Only when CAPE is very high, say, CAPE is in the upper half of the tenth decile (CAPE higher than 27.6), future 10-year stock returns, on average, are lower than those on 10-year U.S. Treasurys,” Valentin Dimitrov and Prem C. Jain wrote in paper titled “Shiller’s CAPE: Market Timing and Risk” on Nov. 17.


Even based on the more common price-earnings ratio, the market looks rich. The S&P 500’s P/E based on earnings of the last 12 months is 18.9, the highest in more than 12 years, according to FactSet.

“U.S. valuations start off as being high both on a historical basis and also on a peer group. Certainly based on the Shiller PE, the equity market seems expensive,” Jefferies chief global equity strategist Sean Darby wrote on Nov. 29.

The above chart requires a bit of interpretation, mainly because of that spike in 1999 which seems to imply a much higher ceiling for stock valuations. It probably doesn’t, because of the uniquely delusional nature of the tech stock bubble. That market was driven by newly-minted dot-coms and related companies that in many cases had minimal or no earnings, so prices weren’t related to profits. In other words, you can’t calculate a price/earnings ratio if there are no earnings.

“Eyeballs” – that is, the number of people visiting at a dot-coms’ website – had temporarily replaced traditional valuation measures in the hearts of speculators. With disastrous results.

Today’s market, in contrast, is made up of companies with actual earnings, so it might be safe to discount 1999 and use the rest of the chart for comparison. In which case current equity prices look extremely dangerous.

On the other hand, today’s world has departed from past business-as-usual in other ways that might be relevant. Debt no longer seems to matter – witness the US, after doubling the federal debt in a single presidential administration, installing a new president whose platform calls for massive increases in borrowing and spending.

And while monetary policy is past eras operated in an at least partially-constrained environment, today there are apparently no limits on how low interest rates can go or how many and what kinds of assets central banks can buy with newly-created currency.

The Japanese and Swiss national banks, for instance, are already huge buyers of equities. If the Fed decides to join that party – something that Chairwoman Janet Yellen has already publicly considered – then it’s not clear whether P/E ratios will continue to matter. The unlimited printing press is definitely an argument for “this time is different.”

So is it no longer possible to make predictions based on pre-QE history? Or are there financial and economic laws that apply no matter what crazy new tools the world’s governments decide to employ?

Almost certainly the latter. Manipulating one part of the system – by, for instance, buying equities with newly-created currency – just shifts the pressure of financial imbalances to a different, harder-to-control place.

Lately the bond market has begun to show signs of stress – because who wants to own zero-coupon long-term bonds in a world where governments need higher inflation and are willing to do pretty much anything to get it?

What happens if governments respond to bond market turmoil by creating even more currency and buying up all the long-term bonds, as Japan is currently doing in its own market? The pressure will shift to the foreign exchange markets, because who will want to own fiat currencies that are being created at rates far exceeding the growth of the real economy?

Fiat currencies are the one thing governments can’t buy up with newly-created money. All are at the moment falling in relation to artificially-inflated stock and real estate prices, though we don’t notice because currencies are valued against each other. But let a soaring money supply translate into rising general prices (something the bond market is now signaling) and it’s game over. Governments will face rising instability without tools capable of managing it.

At which point we’ll return to the above chart and wonder why we didn’t trust history?

Comment viewing options

Select your preferred way to display the comments and click "Save settings" to activate your changes.
balz's picture

Money chases Yield. You have to compare Earnings Yield (opposite of P/E) to a bond Yield. As long as bond don't yield people will buy stocks, so no crash for now.

DirkDiggler11's picture

No, crash won't happen until Jan of 2017. No crash on Obumma's watch, the Wall Street cabal will want to put this crash squarely on Trump and his "policies".

Cruel Aid's picture

in conjunction with a yellen raise, which she may want to do to spite trump optimism. the Fed  may show their cards real soon


LowerSlowerDelaware_LSD's picture
LowerSlowerDelaware_LSD (not verified) max2205 Dec 11, 2016 9:35 PM


SheHunter's picture

Op ex and fed speak this week.  Should be interesting.

knukles's picture

No matter how hard I don't wanna believe that, The Powers That Be Will Not Be Going Gently Into the Night.
They will be fighting for re-ascendancy, tooth and nail until the day they control All the Marbles and Will Never Give Up Till Then.
Period End of Conversation.

This is gonna probably get much worse before it gets.

MFL5591's picture

Gold and Silver down in pre market, that will make it 19 of 21 days down.  No manipualation by the group of shit!  Sure! Hate this whole group of scumbags rigging these markets!

konputa's picture

Remember back when the narrative was that China's launch of the Shanghai gold exchange would be significant enough to end manipulation and cause the price of gold so shoot upward?

Ballin D's picture

itll be nice that we'll finally let the market price itself but I am not ready for the liberal tears.  think how bad its been after one of the least electable humans on the planet lost. can you imagine throwing a temper tantrum over someone who has clearly made a career of bribery, incompetence, and bureaucratic theft from the people? Their tizzy fit is over losing to a guy who more or less matches their stated party objectives.


A real correction will be rough.

tarsubil's picture

My prediction was first half of 2017 so it'll probably happen after 2020.

billwilson2's picture

Have you looked at trump's cabinet. Goldman at the top and all the way down. Looks like the real cabal is about to take over.

abyssinian's picture

No crash, not gonna happen!  Unless Yellen and the scam crew decided to pull the rug, after all of their masters get on the short side.. 

Oldwood's picture

It surely is convenient that despite seemingly everyone in the world predicting the markets would collapse under a Trump election due to his horrible personality, his horrible trade policies, and his misguided tax policies that would bankrupt the government, looky here at what we have instead! And better still it is the same people predicting Trump Doom who are now telling us that the markets are all on a trajectory to the moon BECAUSE of Trump. Amazing!

Now here we set. All time highs, predictions of a crash arising and the Trump haters forming a consensus of election illegitimacy, top of it all, Obama demanding a "full" investigation of Russian interference over the next few weeks. How long did it take them to investigate Hillary's emails, the IRS, fast and Furious and Benghazi? No mind, all purely innocent I'm sure.

So now, I'm sure if we just "happened" to experience a market crash of epic proportions, that catapulted us into social upheaval that just "happened" to coincide with all of the election doubts, Trump doubts and just "happened" to be immediately preceding the inauguration, it would just HAVE TO BE A COINCIDENCE.......RIGHT? And knowing our politicians dedication to tradition, the constitution and the confidence and fidelity of our electoral process, there is NO WAY that they would in any way consider taking full advantage of this chaos. NO. Not at ALL.

PlayMoney's picture

The article assumes the "market" gives a shit about valuations. HA 

SallySnyd's picture

 Here is an interesting look at what another measure is telling us about current stock market valuations:




A century of measuring stock market values using Tobin's Q shows that it always returns to the mean.

PlayMoney's picture

Mr Tobin never met Yeller and her money printing device

Moe Hamhead's picture

No crash for now, and no cash for now!

Aquarius's picture

No need for yields as Central Banks (plus their nominees) and their printing machines are the Prime Buyers of  Bonds and care not if they bottom: just print more money. Loses of no consideration as the "unwashed" will eventually pay.

Stupid is as Stupid Does!

Await the coming Tsunami in early 2017 - SPLAT!!!!!!

Ho hum

Atomizer's picture

Good job Melissa. Thanks for Zerohedge coverage. 

We Are Watching The Long Game to Total Censorship Play Out - YouTube

Contact Snordster, he resides in South Africa. The British portion. He's a good guy.. winks. 


asteroids's picture

Notice that volume has really jumped since Trump was elected. Could be idiots entering the casino fighting to be the "greater fool". Time will tell.

Oldwood's picture

That beloved "sideline" money finally flowing in. All that they were waiting for to be able to fleece the flock. They had to be sure they had all of the money, can't leave any outside or it would compete with their cleaning up.

SheHunter's picture

Not all dumb money.  The election is over, Trump won, time for short, mid-term and longer positioning.

buzzsaw99's picture

Not a badly written piece.  I take exception to the last two sentences in particular:


But let a soaring money supply translate into rising general prices (something the bond market is now signaling) and it’s game over.  Governments will face rising instability without tools capable of managing it.


the usa bond market isn't signaling anything. entities (china, oil producers) are trying to raise cash wothout roiling equities. if anything the bond market is responding to monetary inflation (causing outflows) in china and price deflation in oil and other commodities. As the author alluded, gubbermints are buying equities so clearly they have the tools to "manage" the "economy" because they have been doing it for quite awhile.

whatamaroon's picture

Bueler, anybody out there notice WTI going up and up?

Dazman's picture

I hate that people use P/E charts to lament that the market is overvalued.

Look... I want a crash just like anyone but the trend is very clearly towards higher P/E valuations over time. So you have to assume the mean & median P/E will trend higher accordingly. Which makes sense - as you print more money it will chase everything, pushing up the prices and therefore the P/E.

Clock Crasher's picture

Gold getting clobbered down another 10 FRNs

Clock Crasher's picture

Are we going to run stops below 1045?


Atomizer's picture

You trade fake gold paper, we buy physical gold on spot price. Chuck it in a hiding spot. Does Blithe Masters Comex/JPM Morgan ring a bell?


Atomizer's picture

Follow delivery orders vs actual availability. The site is on another device. Having a brain fart. Sorry. 

DOGGONE's picture

Hello Robert Shiller,
The Wall Street Journal did this once
they know how!
Exhort them to update it!

Atomizer's picture

I haven't used this device in 4-5 months. Not Robert Shiller. Now I have 1,541 emails populated on a BlackBerry Enterprise account. Dipshit. 

The person to review. 



Dr.Carl's picture

Most analystss are not worth reading. This is a good article. But for the most part many of the popular analysts have been predicting a crash for years. A big down turn is going to happen but the only analyst I know of who actually predicts market direction iw www.shepwave.com


Here is some interesting reading below There are some past predictions of SW from their FB page here as well. Can't argue with hard factual PROOF!

The only analyst who is precise and correct in stock market direction is SW...as the charts below prove:





MarketWatch aticle on Goldman.


A bearish market watch article


See the contradictions?

Watch this video. It shows the corruptness behind market watch.


Then compare the only analyst who is actually correctly calling the equity direction and oil and gold


FB post…showing QQQ chart from Dec 2nd


_______________________________  ______________________________________________ 

Oldwood's picture

Is the implication here that the markets are real, not contrived and deliberately manipulated upwards and downwards? Are we also waiting for a crash that is determined by some market fundamentals or can we accept that the market will do what its OWNERS want it to do?

Babs.St.Louis's picture

Hello Oldwood. 


I konw your question was to the other person and not me. But I am nore sure that I understand what you are saying.


I do use the shepwave analysis though. I will read your comment again. Thanks.


Happy Holidays to you

wisetrader224's picture
wisetrader224 (not verified) Babs.St.Louis Dec 11, 2016 9:23 PM

Do not pay attention to oldwood., It is obvious  from his reply to the post above that he did not even see the charts that Shepwave posted to their FB page which PROVE the fact that they do make correct market predictions. They are unlike any ohter.


I would not waste too much time here on Zerohedge trying to help people.  They do not have any money anyway.  Shepwave already has the smart traders. I doubt they need the types that are on here. 

FemDayTrader's picture

Hah! Love it.


PROOF that the smart and rich will get richer and the dumb and poor will only stay poor. And the poor will cry, 'oh it is rigged'. I cannot make any money.  I think that was what Obama was trying to make people believe. Sadly there are many of those types of people as exemplified by Oldwood.  What an appropriate name. I bet you his wife gave him that name. lol

any_mouse's picture

Less than four weeks and resorting to impugning manhood in a debate to prove superiority.

How much USD are you getting per comment?

So many recent entrants to the club. Are these troll jobs reflected in the Jobs data?

I could make remarks about a certain stage in your life.

Or point to "retired English professor". (Old SJW's never die, they just become comment trolls.)

Dr.Carl's picture

Be nice. I did not mean to start a quarrel. I was just intending to show the charts from shepwave that do in fact prove that they are at least calling market direction correctly.


Good luck everyone. Be nice.  Merry Christmas. 

Oldwood's picture

Who built the casino and why? There is no doubt that there are many who make a good living from the casino, but at the end of the day the casino produces nothing, it simply redistributes earnings that came from other productive activities while skimming a taste for itself. Regardless of who wins and who loses, the casino always win. Further, the winners, those who earned something for nothing...placing bets based either on some "science" or just intuition, give hope to all others who might be tempted to enter it's doors. There is a reason why they have metal trays and bells ringing with each payout. INCENTIVE.  What is funny is how the winners are always so smug, so superior in their attitudes, convinced that they are smarter, wiser and superior to all the losers and those too timid to even play. Also one will note that the only ones that are allowed to use REAL science to predict outcomes are the casino owners. They KNOW their profits before the doors open, whereas those who can calculate or count cards are quickly ejected. In market terms "insider trading".

The entire premise of these markets is the simple fact that NO ONE KNOWS the outcomes, for if we all knew what was going to happen, there would be no bets placed. The motivation of every bet is the belief that each person knows what most others do not. If your system of prediction is so infallible, why is it that EVERYONE isn't using it? And if they did, would not the market cease to exist?

FemDayTrader's picture

You can;'t reason with a dimwit. 

FemDayTrader's picture

Oldwood, is that the name your wife gave you?

SheHunter's picture

Fundamentals and market owners are one and the same.  cheers.

Babs.St.Louis's picture

True. Shepwave is the only anlyst in my book. 


What do you make of their upcoming turn date?  Do you think it will coincide with a fed hike?

Most of the people on here are not traders nor investors. Just to let you know. There are very few of us.  

SheHunter's picture

ZH used to be as much a market blog as a political blog.  I would love to see more of these articles and a few fewer political scrubs.

wisetrader224's picture
wisetrader224 (not verified) SheHunter Dec 11, 2016 9:24 PM

I agree She Hunter.  There is way too much bickering going on and it is really annoying. 

Atomizer's picture

True, once the blood in streets sets stage.. we will call you a non investor buying high and no liquid assets. Other than margin calls 

Thank you for reminding us about you.