In fact, US stocks have only been more expensive two times since 1881. According to Yale economist Robert Shiller’s Cyclically Adjusted Price to Earnings (CAPE) ratio – which is the market price divided by ten years’ average earnings – the S&P 500 is above 31. The last two times the market reached such a high valuation were just before the Great Depression in 1929 and the tech bubble in 1999-2000.
The reality, however, is that China’s true leverage picture is far worse, and while there are far more aggressive and pessimistic estimates in the public domain, we have chosen the latest number calculated by Victor Shih from the Mercator Institute for China Studies, who in a just released report calculates that total non-financial credit in China stood around 254 trillion RMB as of May 2017, equivalent to 328% of 2016 nominal GDP, or nearly 100% higher than the official IMF estimate. This is also 34% increase as a share of GDP compared with the end of 2015….
I believe what’s currently happening in Spain represents a crucial microcosm for what we’ll see sweep across the entire planet over the next ten years. Some of you will want to have a discussion about who’s right and who’s wrong in this particular affair, but that’s besides the point. It doesn’t matter which side you favor, what matters is that Madrid/Catalonia is an example of the forces of centralization duking it out with forces of decentralization.
In a 2007 report, the Congressional Budget Office found that coastal properties whose flood insurance had been subsidized by the NFIP exhibited market values far higher than the national average, a disparity the CBO attributed to the general desirability of a waterfront home. But, compared to coastal and inland homes in general, the value difference was magnified among properties with NFIP subsidies, with coastal homes having a average value 86 percent higher than their inland counterparts. Many of the waterfront properties, the study noted, were “nonprincipal residences,” or vacation homes. And the fact of being a stone’s throw from the shore wasn’t the only thing lifting their values.
The last leg higher has been directly responsive to the ramp up in the political “marketing surge” surrounding “tax cuts and tax reform.” With the House having already passed their respective budget resolutions, late Thursday, the Senate passed a budget blueprint for the next fiscal year. With both of the “budget resolutions” in place, it was seen as clearing a hurdle to the goal of overhauling the tax code. This is not new, of course, as the entire rally for the markets since the election has been driven by hopes of lower taxes, despite disaster, floods, fires and Central Bank threats of liquidity extraction.
An endearing quality of a late stage bull market is that it expands the universe of what’s possible. Somehow, rising stock prices make the impossible, possible. They also push the limits of the normal into the paranormal.
Jeffrey Gundlach is known around Wall Street as the Bond King. His Los Angeles-based firm, DoubleLine Capital, manages $116 billion, most of which is invested in bonds. He is also a bit of a Renaissance man, peppering his insights about the credit markets with astute references to Nietzsche, Mondrian, Escher, and Mad magazine covers. That’s why his answer to a simple question—“Why would anyone invest in bonds?”—from someone in the audience at Vanity Fair’s New Establishment Summit, held earlier this month in Los Angeles, was at once both startling and perceptive.
The newest issue of Foreign Affairs features the theme of “America’s Forgotten Wars”, with a cover illustration that juxtaposes a carefree scene of Americans enjoying a picnic with a scene of American soldiers fighting and incurring casualties in some sandy and desolate battle space. The picture depicts truthfully the detachment between, on one hand, the daily interests and attitudes of most Americans and, on the other hand, the disturbing reality of the United States being engaged continuously in a variety of lethal military operations in multiple lands overseas.
In light of the 30-year anniversary of the Black Monday Crash in 1987 (when the Dow lost more than 20% in “one day”, we should be reminded that investor anxiety usually increases when markets get to extremes. If stock prices fall steeply, people fret about money lost, and if they move too high too fast, they worry about sudden reversals. As greed is supposed to be counterbalanced by fear, this relationship should not be surprising. But sometimes the formula breaks down and stocks become very expensive even while investors become increasingly complacent. History has shown that such periods of untethered optimism have often presaged major market corrections. Current data suggests that we are in such a period, and in the words of our current President, we may be “in the calm before the storm.”
And with so many traders short vol, Bass said investors will know the correction has begun when a 4% or 5% drop in equities snowballs into a 10% to 15% decline at the drop of a hat.