"Make no mistake – this is an equity bubble, and a highly advanced one. On the most historically reliable measures, it is easily beyond 1972 and 1987, beyond 1929 and 2007, and is now within about 15% of the 2000 extreme. The main difference between the current episode and that of 2000 is that the 2000 bubble was strikingly obvious in technology, whereas the present one is diffused across all sectors in a way that makes valuations for most stocks actually worse than in 2000. The median price/revenue ratio of S&P 500 components is already far above the 2000 level, and the average across S&P 500 components is nearly the same as in 2000. The extent of this bubble is also partially obscured by record high profit margins that make P/E ratios on single-year measures seem less extreme (though the forward operating P/E of the S&P 500 is already beyond its 2007 peak even without accounting for margins)."
While Bob Shiller's CAPE has been flashing red warnings for a while, String Advisors Stephen Jones warns it is flawed because corporate events can affect a specific company’s earnings and the broader profit outlook differently. However, Warren Buffett's "best single measure of where valuations stand," comparing the market value of US companies to the gross national product before inflation, is flashing near record bubble red... Still we are sure, you'll be able to exit before everyone else when this ends...
The S&P 500 has only been at this level or higher a handful of times in the last 100 years. All of them have coincided with major market peaks.
Yellen’s acting routine is worthy of an Academy Award. In her role, she plays a caring, sweet, grandmotherly type figure all concerned about the poor and middle-class, when reality points to a career as a staunch, frontline protector of the bankster oligarchy.
- Bubble Paranoia Setting in as S&P 500 Surge Stirs Angst (BBG)
- But how will math PhDs determine "fair value" - Wall Street Techs Take Secrets to Next Job at Their Peril (BBG)
- U.S., EU Escalate Russia Sanctions as Putin Holds Firm (Bloomberg)
- Australia Becomes First Developed Nation to Repeal Carbon Tax (WSJ)
- Gaza humanitarian truce goes into force, hours after tunnel clash (Reuters)
- Barclays, Deutsche Bank Said to Face U.S. Senate Hearing (BBG)
- ECB Asset Buying Far Off and May Not Come, Hansson Says (BBG)
- Time Warner win would make Murdoch U.S. media king (Reuters)
- Costly Vertex Drug Is Denied, and Medicaid Patients Sue (WSJ)
- China Rallying for All Wrong Reasons to Top-Rated Analyst (BBG)
- GM recalls some cars with problematic switches; judges others safe (Reuters)
The distinction between the world's only two types of traders (good vs bad) has been a very vague one. Until now. According to a new study by researchers at Caltech and Virginia Tech that looked at the brain activity and behavior of people trading in experimental markets where price bubbles formed, an early warning signal tips off smart traders when to get out even as the "dumb" ones keep ploughing in and chasing the momentum wave. In such markets, where price far outpaces actual value, it appears that wise traders receive an early warning signal from their brains—a warning that makes them feel uncomfortable and urges them to sell, sell, sell.
Investors who feel that zero interest rate policy offers them “no choice” but to hold stocks are likely choosing to experience negative returns instead of zero. While millions of investors appear to have the same expectation that they will be able to sell before everyone else, the question “sell to whom?” will probably remain unanswered until it is too late. It’s an unfortunate situation, but much of what investors view as “wealth” here is little but transitory quotes on a screen and blotches of ink on pieces of paper that have today’s date on them. Investors seem to have forgotten how that works. Few are likely to realize that apparent wealth by selling. As The BIS warned recently...“The risks of failing to act should not be underestimated.”
The Federal Reserve’s policy of quantitative easing has produced a historically prolonged period of speculative yield-seeking by investors starved for safe return. The problem with simply concluding that quantitative easing can do this forever is that even speculative assets have to compete with zero. When a safe zero return is above the medium or long-term return that one can estimate for a very risky asset, the rationale for continuing to hold the risky asset becomes purely dependent on expectations of immediate short-term price gains. If speculative momentum starts to break, participants often try to get out the door simultaneously – especially if there is some material event that increases general aversion to risk. That’s the dynamic that produces market crashes.
Market extremes generally share a common formula. One part reality is blended with one part misguided perception (typically extrapolating recent trends as if they are driven by some reliable and permanent mechanism), and often one part pure delusion (typically in the form of a colorful hallucination with elves, gnomes and dancing mushrooms all singing in harmony that reliable valuation measures no longer matter). This time is not different.
As student loan bailouts rain down from Washington, we thought it may be useful to consider where the world's wealthiest University alumni are. As Private Wealth reports, following a survey of 70,000 millionaires around the world, eight of the top ten universities with the highest number of rich alumni are based in the U.S., with the U.K. home to the other two. Engineering degrees produced the most millionaires, although most engineering grads made money as entrepreneurs, the study revealed. MBAs, law, accounting, and finance degrees also led to financial success.
We are witnessing implied volatility on all asset classes simply collapse to the lowest levels witnessed in 20 years, or at least the lowest levels achieved prior to the GFC in early 2007.
The destructive consequences of a parasitic Tyranny of the Wealthy and Majority have yet to play out, but they will, and sooner than most believe possible.
Historically, Warren Buffett has seemingly disagreed with his father Howard who called for "a return to a gold standard" and knew the great Austrian economic school economist Murray Rothbard. However, we suspect his recent startlingly crony-laden comments on Tim Geithner's new book would have made his dad roll over his grave... "Sensational... Tim's book will forever be the definitive work on what causes financial panics and what must be done to stem them when they occur."
Having been described by Warren Buffett as "the best single measure of where valuations stand at any given moment," Advisor Perspectives' Doug Short is perplexed at Warren's recent note to his CNBC brethren that "markets are not too frothy." Perhaps, as the following chart will shockingly identify, it is time to listen less and study more as Buffett's "Market Cap to GDP" indicator has risen seven quarters in a row and is only trumped in its absolute bubble exuberance by the very peak in 2000. Maybe, despite all the talking heads trying to explain what he meant, Tepper is right to be concerned, that the market is "dangerous" and given his historical comments - looking at this chart - what would Warren do?
- Bank of England sees 'no housing bubble' (Independent)
- ‘If the euro falls, Europe falls’ (FT)
- India's pro-business Modi storms to historic election win (Reuters)
- Global Growth Worries Climb (WSJ)
- Bitcoin Foundation hit by resignations over new director (Reuters)
- Blackstone Goes All In After the Flop (WSJ)
- SAC's Steinberg loses bid for insider trading acquittal (Reuters)
- Beats Satan: Republicans Paint Reid as Bogeyman in 2014 Senate Races (BBG)
- Tech Firms, Small Startups Object to Paying for Internet 'Fast Lanes' (WSJ) - but they just provide liquidity
- U.S. Warns Russia of Sanctions as Ukraine Troops Advance (BBG)
- Major U.S. hedge funds sold 'momentum' Internet names in first-quarter (Reuters)